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Mexican Energy Reform

Constitutional Reform and Secondary Legislation José Antonio Postigo-Uribe Gerardo Prado-Hernández Guillermo Villaseñor-Tadeo

August 2014


Mexican Energy Reform

Outline Energy Reform Overview Hydrocarbon Sector: Challenges Electricity Sector: Challenges The Energy Reform The New Scenario for Investors

Hydrocarbon Sector Reform Electric Sector Reform Land Issues Transition Period Business Opportunities


Energy Reform Overview


Mexican Energy Reform

Hydrocarbon Sector: Challenges Administration of underground oil resources

Exploration and extraction of oil and gas

PRIOR TO REFORM: PEMEX administers the oil resources through its operations* and through contracts with private parties Requests SENER authorization, which is generally granted

Petrochemical refining activity (gasoline, diesel, natural gas, L.P. gas)

PEMEX refines oil (gasoline and diesel) and produces “basic petrochemical” (natural gas and liquefied oil gas) without the need of Federal Executive permission “Secondary petrochemicals” are open to private investment: PEMEX and private parties produce it without the need of permission

Transportation, storage, and sale of refined products and petrochemicals

PEMEX and private parties transport, store, and sell natural gas and L.P. gas after receiving Federal Executive permission Private parties carry out duct transportation and sell gasoline and diesel.

Source: SENER

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Mexican Energy Reform

Hydrocarbon Sector: Challenges Extraction issues: In order to work optimally, the exploration and extraction industry needs US$ 60 billion per year. PEMEX was at least US$ 30 billion short in its last budget. PEMEX is the number one company in the production of heavy crude oil in shallow water. Prior to the reform PEMEX had to run all types of hydrocarbon exploration and extraction projects and assume all related risks, which impeded exploiting its potential in shallow waters. Large investments are required to produce hydrocarbons in deep and ultra deep sea waters, as each well has an estimated cost of US$ 150 to 200 million. The US invested between US$ 20.55 billion and 27.4 billion (excluding submarine infrastructure) in 2012 to drill 137 wells. PEMEX’s exploration and production budget for 2013 was US$ 20 billion. Production in deep waters with this budget would result in the need to abandon production on land and in shallow waters.


Mexican Energy Reform

Hydrocarbon Sector: Challenges Extraction issues: In 2012, the US produced 700 thousand barrels of petroleum daily and over 26 billion cubic feet of gas (shale gas), after granting 9,000 thousand perforation permits granted to approximately 170 companies. North American geological gas and shale structures extend to the territory of Mexico; however, PEMEX only has 3 active wells in the states of Coauhila, Chihuahua, and Tamaulipas (Emergente 1, N贸mada 1, and Monta帽ez 1). The majority of petroleum and associated gas production fields in the country are currently in decline or close to starting such process. Of the 369 fields with reserves for oil and associated gas production, 317 are ripe fields for production, about to start losing production, or in decline. However, Mexico does not have tertiary or enhanced recovery projects, which would increase the petroleum recovery rate from 5% to 30%. Arranging better recovery projects in certain ripe fields in the country requires technological capacity and a level of human capital that is not currently available in the country.


Mexican Energy Reform

Hydrocarbon Sector: Challenges PEMEX’s Energy Sovereignty: has historically had total control over and responsibility for fuel production and supply in Mexico, required to both develop all types of hydrocarbon oil fields and cover the national fuel supply on its own. This has caused a growing gap between the nation’s oil supply and domestic demand. The following chart demonstrates the ratio between hydrocarbon (including petroleum, natural gas, petroleum products, and petrochemicals) export and import values. One can see that, in the 90s, the value of exports was about seven times the value of imports.


Mexican Energy Reform

Electricity Sector: Challenges The electric sector in Mexico comprises generation, operational control, transmission, distribution, and commercialization activities. Prior to the reform, and with the exception of certain schemes clearly defined in electric generation, the sector was conducted and operated by CFE:


Mexican Energy Reform

Electricity Sector: Challenges 1. Non-competitive electricity prices. 2. Limitations and costs on electricity generation. 3. Limitations on electricity transmission and distribution. 4. Conflicts of interest in the National Electricity Grid System. 5. Federal Electricity Commission financial situation. 6. Limitations on energy transition.


Mexican Energy Reform

Energy Reform Overview Energy Reform: amendment of Articles 25, 27, and 28 of the Political Constitution of the Mexican United States approved on 12 December 2013 and published on 20 December 2013. Included 21 transitory articles providing for the publishing and amendment of secondary legislation and the creation of new regulatory entities.

Intends to create an open market in the sector and attract investment while preserving Mexican ownership over hydrocarbons found underground. Expected to create economic benefits including reduced electricity, gas, and food prices, restitution of proven oil and gas reserves at a rate higher than 100%, increase oil and gas production, generate growth and job creation.

As a consequence of the constitutional reform, on 30 April 2014 the Executive submitted 9 initiatives of secondary legislation to Mexican Congress that result in 21 secondary laws: 9 new laws and amendments to 12 existing laws. The secondary laws establish the details regarding the liberalized sectors, types of contracts that may be used, revenues and taxation, and regulatory bodies (creation of new ones, amendment of the activities of the existing ones), etc.


The New Scenario for Investors: Hydrocarbons


Mexican Energy Reform

Hydrocarbon Sector Reform: Constitutional Reform 1. Underground hydrocarbons located in Mexican territory continue to be Mexican property, and the granting of concessions on them is still prohibited. 2. The federal government will have the ability to engage in hydrocarbon exploration and production through assignments to for-profit State companies or “FPSC” (“forprofit” being within the construct of enterprises owned by the State) or through contracts with those companies or with private parties. The model contracts include: Licenses. Profit Sharing. Production Sharing. Services.

3. For the above purposes, PEMEX will be transformed into a for-profit state company within two years, with the capability to enter into agreements with private parties to explore and produce. PEMEX will have preference to carry out certain projects known as “Round Zero.”


Mexican Energy Reform

Hydrocarbon Sector Reform: Constitutional Reform 4. To promote the participation of national and local production chains, certain minimum percentages of national content will be required in the execution of the assignments and contracts. With the exception of deep and ultra sea deep waters, where national content requirement will be established by the Energy Secretariat (SENER) in the future, all contracts and arrangements should contemplate at least an average of national content intended to eventually become in general 35%.

5. The SENER will be in charge of establishing, conducting, and coordinating energy policy, assignment adjudication and contract area selection, contract design, and bidding process technical guidelines, as well as permit granting for oil refining and treatment and natural gas processing. 6. The National Hydrocarbons Commission (CNH) will be in charge of activities including bidding process management, granting and execution of exploration and production contracts, assignation and contract technical management, and productivity maximization of extraction plans. 7. The Energy Regulation Commission (CRE) will be in charge of granting permits for the storage, transportation, and distribution through oil, gas, and petrochemical pipelines; regulating access to the ducts by third parties and of first hand sales.


Mexican Energy Reform

Hydrocarbon Sector Reform: Constitutional Reform 8.

A public and decentralized body named National Center for the Control of Natural Gas (CENAGAS) will be created for national pipeline system operation. The government will have 12 months from the time the energy reform is effective to create CENAGAS.

9.

The Mexican Oil Fund for the Stabilization and Development (FMPED) will be created as a public trust with the Central Bank of Mexico, which will be its fiduciary for the administration of the funds from oil sales.

10. The National Agency of Industrial Safety and Environment Protection of the Hydrocarbons Sector will be created as a decentralized body of the Environment and National Resources Secretariat to regulate and oversee the industrial/ operating safety and environmental protection of premises and activities. 11. The Union of Oil Workers of the Mexican Republic will no longer have seats in the Board of PEMEX. Its Board will consist of five members of the Federal Administration and five independent members, in order to achieve its professional management and more operating transparency.


Mexican Energy Reform

The New Scenario for Investors: How to Participate Exploration and production: E&P remains a strategic activity of the state to be carried through: 1. Assignments to PEMEX following Round Zero (results expected in September). Private parties may participate in these projects only through services agreements with PEMEX or other FPSCs, except that PEMEX and other FPSCs may request that an assignment be transformed into a contract, in which case a bidding process should be followed to select PEMEX’s partner. 2. E&P Contracts awarded by the CNH following bidding processes, to be signed between the federal government and private investors, or private investors in alliance with PEMEX or other FPSCs. 3. Contracts awarded through direct adjudication to mining concessionaires provided solvency, technical, administrative, and financial capacity is evidenced, since they are allowed to exploit the gas produced in the mines subject to concession without the need of a further bidding process. 4. Contracts between CNH and PEMEX, other FPSCs, or private investors following bidding processes for the commercialization of hydrocarbons resulting from E&P contracts.


Mexican Energy Reform

The New Scenario for Investors: How to Participate Further authorization by the CNH will be required to drill in oil wells in the case of exploratory wells, deep and ultra deep waters, and model design wells. Midstream and downstream activities subject to federal permits, including: 1.

Treatment, refinement, sale, commercialization, transportation, and storage of petroleum.

2.

Processing, compression, liquefaction, decompression, regasification, transportation, storage, distribution, commercialization, and retail sale of natural gas.

3.

Transportation, storage, distribution, commercialization, and retail sale of oil products (petrolĂ­feros).

4.

Transportation through pipelines and storage related to petrochemicals pipelines.


Mexican Energy Reform

The New Scenario for Investors: New Contracts for Exploration and Production Types of contracts: a. b. c. d.

License. Profit sharing. Production sharing. Services.

Bidding terms may require federal government participation in the project (up to 30% of the investment) through PEMEX, other FPSCs or an SPV in certain cases (proximity to assignation, knowledge and technology opportunity, or specialized financial vehicle). participation of at least 20% of the investment by PEMEX or other FPSCs compulsory in areas where cross border fields may be found (as determined by SENER assisted by CNH). Model contracts must include pre defined terms like a system for external audits, early termination (including “administrative rescission�), disclosure of compensation and other payments, minimum national content, penalties, and prohibition of limitation of liability in case of negligence of willful misconduct.


Mexican Energy Reform

The New Scenario for Investors: New Contracts for Exploration and Production Resolution of disputes other than administrative rescission may be submitted to arbitration. The arbitration procedure must be under Mexican law, in Spanish, and in law. Bidding terms must have the favorable opinion of the federal antitrust commission regarding bidders’ eligibility criteria and adjudication process. Deemed favorable if no opinion in 30 days.


Mexican Energy Reform

The New Scenario for Investors: Eligible Companies for E&P Contracts Private companies must meet the following to be eligible for the award of E&P contracts: Qualify as Mexican tax residents. Corporate scope is exclusively comprised by exploration and production of hydrocarbons activities. Are not subject to income tax under the special consolidation regime (Regimen Opcional para Grupos de Sociedades). Companies with residence outside of Mexico may bid in public tenders, but if awarded with the contract must incorporate a Mexican company that meets the above requirements to enter into the relevant contract with the federal government. Companies may present bids in public tenders individually, in a joint venture, or through a consortium (consorcio in Spanish). A Consortium is comprised by two or more companies, where one acts as the operating entity and performs activities concerning the E&P contract on behalf and account of the other companies.


Mexican Energy Reform

The New Scenario for Investors: Payments Under the New Contracts The Hydrocarbons Revenue Law outlines the basic structure and nature of payments to the federal government by private companies that enter into these contracts: The exact amount payable by private companies will be determined on a contract-by-contract basis. Different payments will be in place based on a system that comprises: signing bonus; fee for exploration or production phases; royalties; or, a percentage of the operational profit of a project. Private companies will be compensated for their participation in E&P activities based on: license to the actual production; a percentage of the operational profit / production of the project; or a cash consideration for services rendered.


Mexican Energy Reform

The New Scenario for Investors: Payments to Federal Government for Exploration and Production Initial Signing Fee

Companies must pay a fee to the federal government upon the execution of the E&P contract. This fee is aimed to serve as a filter of applications from those that lack the economic resources to succeed.

Contractual Quota for the Exploratory Phase

Companies must make monthly payments to the federal government from the time of execution of the E&P contract until commercial production begins. For the first 60 months, the quota is $1,150 Mexican pesos per square kilometer, and it increases to $2,750 Mexican pesos from month 61 and after.

Royalty

Companies must pay a royalty in the amount resulting from applying a percentage to gross income derived from the production of hydrocarbons. This royalty increases in proportion to increases in the market value of hydrocarbons. A different rate is set for oil (starting at 7.5%) and gas (starting at 0%).

Percentage on Operational Profit

Companies must assess an annual operational profit, computed by subtracting royalty payments and operational expenses from the contractual value of production. Operational expenses include costs and investments in the general terms granted for income tax purposes with particular exceptions. NOLs may be carried forward for 15 years in deepwater activities, and for 10 years in other cases .


Mexican Energy Reform

The New Scenario for Investors: Compensation to Companies for Exploration and Production Payments to the Federal Government

Contract Services Contract

License Contract

Profit Sharing Contract

All of the oil or gas production.

 

Initial Signing Fee. Contractual quota for the exploratory phase. Royalty. Rate on the contractual value of hydrocarbons.

 

  

Production Sharing  Contract 

Contractual quota for the exploratory phase. Royalty. Percentage on operational profit.

Contractual quota for the exploratory phase. Royalty. Percentage on operational profit.

Consideration to the Private Company 

Cash.

Companies are entitled to the extracted oil or gas production after the contractual payments are made to the State.

Refund of authorized expenses, costs and investments incurred by the company in connection with the contract. Operational profit after distribution of a percentage on operational profit to the government.

Expenses, costs and investments refund; unlike profit sharing contracts, production sharing contracts may be executed without this consideration to the contractor. Percentage of the oil or gas production.


Mexican Energy Reform

The New Scenario for Investors: Tax on E&P Activities Tax on Hydrocarbons E&P activities: Aside from payments made by companies to the federal government under each E&P contract, companies must pay the new Tax on Hydrocarbons Exploration and Exploitation Activities. The purpose of this Tax is to repair ecological damages suffered by States and Municipalities as a result of hydrocarbons exploration and production activities, and is monthly paid as follows:

Phase of Activities

Monthly Tax Tariff

Exploratory Phase

1,500 Mexican Pesos per square kilometer

Production Phase

6,000 Mexican Pesos per square kilometer


Mexican Energy Reform

The New Scenario for Investors: Taxation of Foreign Residents and VAT Taxation of Foreign Residents Services by entities Foreign tax residents who render any services in Mexico in connection with E&P activities, for a period of 30 days or more during any 12-month period, will constitute a permanent establishment in Mexico for income tax purposes. Therefore, the foreign tax residents will be subject to tax on income attributable to their permanent establishment under the general rules for Mexican tax resident companies. Salary payments to individuals Foreign tax resident individuals that perform subordinated work in Mexico and receive salary payments from a foreign tax resident will be subject to tax in Mexico when work is performed for more than 30 days within any 12-month period.

Value Added Tax VAT on activities performed by companies pursuant to an E&P contract will be triggered at the 0% rate. This means companies will not transfer VAT to the Federal Government but may credit VAT transferred to them by suppliers.


Mexican Energy Reform

The New Scenario for Investors: PEMEX as Another Player/Partner 1. PEMEX is a FPSC, owned by the Mexican state, with legal personality and technical, operational and managerial autonomy, governed by the PEMEX Law and commercial and civil law (rather than administrative law). Other laws may be applicable because of their subject matter provided they do not contradict PEMEX Law. 2. PEMEX purpose is to carry upstream, midstream, and downstream activities generating profits for the state, and may achieve its purposes directly or through agreements, partnerships, associations or any other means, with national or international, private or public individuals and legal entities, entering into agreements, signing debt instruments and giving guarantees, provided that underground hydrocarbons will remain the property of the state. 3. PEMEX will be governed by a board of 10 members (the energy secretary, with casting vote, the treasury secretary, 3 members of the federal government appointed by the executive, and 5 independent members appointed by the executive and ratified by the senate), and a general manager (appointed by the executive), and will have a 5 year business plan. Liability of PEMEX directors regulated in PEMEX Law (instead of public servant’s liability law).


Mexican Energy Reform

The New Scenario for Investors: PEMEX as Another Player/Partner 4. PEMEX activity to be supervised by an audit committee, an internal auditor, and an external auditor. 5. PEMEX may carry out its activities directly or through “subsidiaries” (FPSCs subject to PEMEX law), “affiliates” (PEMEX interest>50%), minority interests, or other associations: a. E&P activities under assignments must be carried out through subsidiaries. b. Activities under E&P contracts (whether awarded to PEMEX following a bidding process or resulting from the transformation of an assignment) to be carried through: i.

Subsidiaries if there is no private party participation.

ii.

Affiliates, minority interests or other associations if there is an alliance/association with private parties, including subsidiaries and affiliates to participate in consortia.


Mexican Energy Reform

The New Scenario for Investors: PEMEX as Another Player/Partner 4. As a general rule, contracting with PEMEX (lease, acquisition, services, works) will be effected through bidding processes. the board may authorize different processes. the contracting process is subject to administrative law; once signed, the contract is subject to private law. thus, contract adjudication subject to challenge in administrative court. 5. PEMEX bound to pay a “state dividend� to be determined by congress following the proposal by the treasury secretary based on the information provided by the board (results of PEMEX and subsidiaries; 1 year and 5 year plans). 6. PEMEX budget and debt regulated in PEMEX law. 7. Federal courts have jurisdiction over national disputes involving PEMEX and FPSCs, who are exempt from the obligation to provide guarantees even in judicial proceedings. PEMEX and FPSCs may, however, agree ADR mechanisms. for acts and contracts with effects in foreign countries PEMEX and FPSCs may agree to subject them to foreign law, foreign courts (for commercial matters), and arbitration.


The New Scenario for Investors: Electricity


Mexican Energy Reform

Electricity Sector Reform: Constitutional Reform 1. The Federal Electricity Commission (CFE) will also be transformed into a FPSC. 2. The National Electricity Grid System and the transmission and distribution networks, will continue to be controlled by the government through the CENACE, which is a decentralized public body (Art. 28 designates the areas of planning and control of the national electrical grid system, as well as the public service of electricity transmission and distribution, as strategic areas). The government will have 12 months from the effectiveness of the secondary legislation to decentralize the CENACE. 3. Private parties will be able to generate and commercialize electricity, and have limited participation related to transmission and distribution assets through contractual arrangements. 4. The CRE will be in charge of the regulation and granting of the permits for electricity generation and the establishment of electricity transmission and distribution tariffs.


Mexican Energy Reform

The New Scenario for Investors: The New Electricity Sector 1. Generation, transmission, distribution and commercialization of electricity for public service purposes historically reserved to the federal government through the CFE and Luz y Fuerza del Centro (currently extinct). Private participation in generation through certain schemes allowed since 1992. 2. The CFE to be converted into a FPSC and be another player in the market. It will keep ownership and control of the transmission and distribution assets and activities, but administration of that public service will be under the control of the CENACE, a government decentralized entity and regulated by the CRE (regulations, tariffs…). 3. Private parties may: Generate electricity under a “single permit.” Commercialize electricity under federal authorization. Enter into agreements related to transmission and distribution activities, construction and expansion of the grid, etc. with the CENACE. 4. The electricity market will become a wholesale market operated by CENACE, in which participants (generators, sellers, suppliers, and qualified users) may sell and purchase electricity and ancillary services (like regulation of frequency) or power, including via importation or exportation, “transmission financial rights,” and “clean energy certificates.”


Mexican Energy Reform

The New Scenario for Investors: CFE as Another Player/Partner 1. CFE is a FPSC, owned by the Mexican state, with legal personality and technical, operational and managerial autonomy, governed by the CFE Law and commercial and civil law (rather than administrative law). other laws may be applicable because of their subject matter provided they do not contradict CFE Law. 2. CFE purpose is to carry out the public service of transmission and distribution of electricity on behalf of the state, and may also carry out generation, research, and other activities related to the electricity sector. it may achieve its purpose directly or through agreements, partnerships, associations or any other means, with national or international, private or public individuals and legal entities, entering into agreements, signing debt instruments and giving guarantees. 3. CFE will be governed by a board of 10 members (the energy secretary, with casting vote, the treasury secretary, 3 members of the federal government appointed by the executive, 4 independent members appointed by the executive and ratified by the senate), and 1 member appointed by CFE and its FPSCs’ workers, and a general manager (appointed by the executive), and will have a 5 year business plan. Liability of CFE’s directors regulated in CFE Law (instead of public servant’s liability law).


Mexican Energy Reform

The New Scenario for Investors: CFE as Another Player/Partner 4. CFE activity to be supervised by an audit committee, an internal auditor, and an external auditor. 5. CFE may carry out its activities directly or through “subsidiaries” (FPSCs subject to CFE law), “affiliates” (CFE interest>50%), minority interests, or other associations. Transmission and distribution of electricity must be done through subsidiaries, but CFE and its subsidiaries may:

a. Enter into contracts with private parties for the financing, installation, maintenance, management, operation and expansion of the necessary infrastructure to render those services. b. Carry out those activities in alliance or association with private parties, whether through affiliates, minority interests, or other forms of association.


Mexican Energy Reform

The New Scenario for Investors: CFE as Another Player/Partner 6. As a general rule, contracting with CFE (lease, acquisition, services, works) will be effected through bidding processes. The board may authorize different processes. the contracting process is subject to administrative law; once signed, the contract is subject to private law. Thus, contract adjudication subject to challenge in administrative court. 7. CFE bound to pay a “state dividend� to be determined by congress following the proposal by the treasury secretary based on the information provided by the board (results of CFE and subsidiaries; 1 year and 5 year plans). 8. CFE budget and debt regulated in CFE Law. 9. Federal courts have jurisdiction over national disputes involving CFE and FPSCs, who are exempt from the obligation to provide guarantees even in judicial proceedings. CFE and FPSCs may, however, agree ADR mechanisms. for acts and contracts with effects in foreign countries CFE and FPSCs may agree to subject them to foreign law, foreign courts (for commercial matters), and arbitration.


Mexican Energy Reform

The New Scenario for Investors: Renewables According to the Mexican authorities the country possesses abundant renewable resources through all of its territory: Solar resources: a number of regions have solar insolation averages of 5.5 kWh/m2. Resources scarcely exploited although available in over 75% of the territory. Wind resources: the country has wind resources sufficient to produce in excess of 40GW of power, 25% of which in southern regions. Geothermal resources: estimated in around 35GW of power. Hydroelectric power generation is well developed so far but there area still resources to be exploited.

There are many areas with potential grow of alternative crops which can be transformed into bio-fuels. Areas of opportunity for obtaining biogas from landfills. A package of laws that will further regulate clean energies is set to be discussed by the end of the year.


Land Issues


Mexican Energy Reform

Land Issues Access to land is crucial to energy development, especially in E&P and electricity projects, and has historically been one of the main challenging aspects for developing a renewable energy project in Mexico, where the most common ways to access land for a project are lease, usufruct and/or easement agreements. Acquisition of land is less common and legal and other restrictions may apply. Whether the land is private or agrarian has significant impact:

Private property is subject to state law, and that will dictate the terms under which the developer will negotiate for the project. Lack of land titles from the owners, mainly in rural zones, is a common problem. Agrarian property is subject to Agrarian law and it is government land granted for use by members of local ejidos (similar to Native American land in the US). Ejidos commonly have land title and registration issues. Negotiations with ejidatarios are often difficult and social and political issues may be of impact. Land acquisition was intensely debated during the legislative process, resulting in a specific procedure that excludes expropriation.


Mexican Energy Reform

Land Issues Compensation and terms and conditions for the use of land or rights necessary for E&P, for rendering the public service of transmission of electricity, or cogeneration plants and others that must be built in a specific location, to be negotiated and agreed with the owners or holders of the corresponding rights. In the case of private property, acquisition will be possible. The negotiation process must be subject to the provisions of Hydrocarbons Law or the Electricity Industry Law, as the case may be: Notice by the party interested in the land to the holders of rights over land indicating: interest in the land, how it would be used (lease, easement, acquisition‌), and the intended project, including details of potential consequences of the land use, and compensation (which may be determined through third party experts and that must include potential damages to the land and ancillary uses, and a percentage of the revenues of the interested party under the project in the case of E&P). Notice to the authorities. The SENER may determine that “social witnessesâ€? participate in the process. Special provisions apply for ejidos.


Mexican Energy Reform

Land Issues The agreed terms must be formalized in writing in accordance with the guidelines and templates issued by the authorities. These agreements may not include confidentiality provisions regarding the terms, amounts, and conditions of the agreed compensation penalizing the parties for disclosure. These agreements must be validated by a judge or court, as the case may be. If no agreement is reached within 180 days from the notice by the party interested in the land, this party may request the creation of a legal easement through an administrative procedure (mediation) or a judicial procedure. The legal easement would comprise the rights to access; transport; move and store construction materials, vehicles, machinery and goods; construct, install or maintain infrastructure or carry out works necessary for the project.


Transition Period


Mexican Energy Reform

Transitional Provisions: Hydrocarbons Law The new Hydrocarbons Law is effective from the day after its publication. Former regulations remain in force to the extent they do not contradict the new Law until new regulations are in place. The Hydrocarbons Law regulations should be approved within 180 days from publication of the former. While they are approved, the SENER, the Treasury Secretariat, the CNH and the CRE have the authority granted to them under the new law.

Permits and authorizations requested prior to the enactment of the law will be granted in accordance with the former legislation. Permits granted under the old legislation will remain in force in their own terms and subject to the new Law. Starting on January 1, 2015, the SENER and the CRE will be authorized to grant permits and authorizations respecting the special provisions regarding: Gasoline and diesel: during 2014 prices will be fixed in accordance with legislation in force. Starting on January 1, 2015 and until December 31, 2017 mรกximum prices will be determined by the executive considering costs and inflation. Starting on January 1, 2018, prices will be determined in market conditions.


Mexican Energy Reform

Transitional Provisions: Hydrocarbons Law Until December 31, 2016 maximum, only PEMEX and its subsidiary FPSC may be granted gasoline and diesel import permits. Starting on January 1, 2017, or earlier if market condition permits, importation of gasoline and diesel may be granted to any interested party complying with legal requirements. CRE will grant these permits starting on January 1, 2016. Sale of liquefied gas and petroleum to the public: prices to be approved by the federal government until implementation of a program with focused on consumer support. Such program must be implemented prior to December 31, 2016, and promote sustainability and efficiency. Until December 31, 2015, permits for the importation of liquefied petroleum gas can only be granted to PEMEX and its subsidiaries and affiliates. After January 1, 2016 or earlier if the market so permits, these permits may be granted to any interested party complying with legal requirements.

Activities subject to permit carried out without permit (including treating, refining, and compressing petroleum) may continue provided that the corresponding permits are applied for by December 31, 2015.


Mexican Energy Reform

Transitional Provisions: Hydrocarbons Law Mining concessionaires holding permits for the use of the gas produced in the mines subject to concession have 90 days to request the direct adjudication of E&P contracts over the gas produced in the mines. Old permits will expire 180 days from enactment of the Law. The CNH may directly adjudicate PEMEX, its subsidiaries or affiliates or another FPSCs an E&P contract to be in force up to 31 December 2017. After January 1, 2018, adjudications will require a prior bidding process. CENAGAS to be created within 12 months from enactment of the law. CRE to continue subjecting first hand sales of hidrocarbons and oil (petrolĂ­feros and petroquĂ­micos) to regulation to limit the dominating power of PEMEX until there is broader participation in the sector promoting competition.

CRE to issue the general open access criteria for the oil transport, storage and distribution infrastructure within 365 days from enactment of the law.


Mexican Energy Reform

Transitional Provisions: Hydrocarbons Law Services, works, supply or operation contracts enterd into by PEMEX under the former legislation will continue in force in their own terms. During the two years following approval of the law, the time periods therein provided will be extended in 1/3. The law applies to PEMEX, the CFE and the CRE and their subsidiary bodies while they are transformed into FPSCs. Minimium national content in E&P will increase gradually from 25% in 2015 to 35% in 2025, and will be updated every 5 years. This excludes activities in deep and ultra-deep waters, which will have their own values. Permit holders who increase the capacity of natural gas transportation pipes under permits granted prior to the law and financed by users for self consumption may recover a percentage of the cost invested in the terms established by the CRE.


Mexican Energy Reform

Transitional Provisions: Hydrocarbons Law Until December 31, 2015, permits for transportation, storage, and distribution not linked to pipes, and for the sale to the public of liquefied oil gas will be issued by the SENER, which will also determine the maximum tariffs for transportation. E&P contracts and financed public works contracts entered into by PEMEX or its subsidiary bodies and in force upon the law being enacted will remain in their own terms. The parties to those contracts may request that they are transformed into assignations or contracts without the need of a bidding process, following the guidelines established by the SENER and the Treasury Secretariat.


Mexican Energy Reform

Transitional Provisions: Adjustment Period for PEMEX and FPSC New PEMEX Law will be effective the day after appointment of PEMEX board by the executive, which must take place within 90 days from publication of the law, except (a) that the provisions on budget, debt, acquisitions, contracting, compensations, and subsidiaries and affiliates will be in force when the new board of PEMEX takes office, which will be published by the SENER in the official gazette, and the new mechanisms for auditing, transparency, and accountability are in place, and (b) that the state dividend will start being payable in 2016.

PEMEX current general manager stays in his position. 45 days after formation of the new board, he must submit a plan for the corporate reorganization of PEMEX, adjusting its structure to the provisions about subsidiaries and affiliates. The board will have 3 months to adapt it and approve it. In the meantime, PEMEX subsidiary bodies (including Pemex exploración y producción, Pemex gas…) will continue in existence under the former legal status. Contracting processes by PEMEX initiated under the former legislation will be finalized in accordance with that legislation. Agreements by PEMEX and subsidiary bodies entered into under the former legislation remain in force in their own terms, but PEMEX and its subsidiaries and affiliates resulting from the reorganization may amend those contracts to adjust them to the new law.


Mexican Energy Reform

Transitional Provisions: Electricity Industry Law The Law becomes into force the day after its publication, with a few transitional provisions. Self-generation, cogeneration, independent production, small production, importation, exportation and continued self use permits and contracts granted under former legislation and applications for those permits made before enactment of the Law will continue to be governed and will be resolved under the former legislation to the extent it does not contradict the new one. Permit and contract holders may request that they are converted into “single permits� for generation under the Electricity Industry Law, and may request that their conditions and interconnection agreements be reverted to the former regime within 5 years since conversion. These permit holders may also apply for interconnection agreements under the former regime in certain cases. During the restructuring period of the electricity industry market, CFE and CENACE will continue to render the services of generation, transmission, and commercialization of electricity to ensure continuity of supply.


Mexican Energy Reform

Transitional Provisions: Electricity Industry Law The SENER will coordinate the restructuring of the electricity industry market, establishing the policies and actions required for implementation of processes and the terms during the restructuring period. It will issue the first rules of the electricity market, including the basis and operating provisions, and will interpret the law for administative effects. The SENER will declare the starting of operations of the electricity market, and the rules on that market will be in force upon starting of operations. The SENER will supervise the wholesale market with the technical support of the CRE during the first year of operation of the market. Thereafter, the CRE will supervise the market. CRE will carry out the accounting, operating, funciontal and legal separation of the activities of generation, transmission, distribution, and commercialization in the terms established by the SENER and the CRE.


Mexican Energy Reform

Transitional Provisions: Electricity Industry Law CENACE must be decentralized within 6 months from enactment of the law and sufficient assets to fulfill its purpose must be transferred to CENACE within 3 months from decentralization. During the transition period of the CENACE, the CFE will carry out the operating control of the national electrical system and other funcions atributed to the CENACE. The CRE will issue or authorize model contracts for the electricity industry within 9 months from enactment of the Law. The CENACE will enter into those contracts within 3 months of them being issued or the request of the corresponding application. Terms and conditions of existing Interconnection agreements may be amended, and they will remain in force but cannot be extended. During the period between the enactment of the law and the starting of operations of the wholesale electricity market, the CFE and its basic services suppliers may enter into electric coverage contracts without the need of the bidding processes set forth in the law. Basic services suppliers will have the option to enter into contracts for the basic supply under a special system, with prices based on costs and the corresponding contracts.


Mexican Energy Reform

Transitional Provisions: Adjustment Period for CFE and FPSCs New CFE Law effective the day after appointment of CFE board by the executive, which must take place within 90 days from publication of the law, except (a) that the provisions on budget, debt, acquisitions, contracting, compensations, and subsidiaries and affiliates will be in force when the new board of CFE takes office, which will be published by the SENER in the official gazette, and the new mechanisms for auditing, transparency, and accountability are in place, and (b) that the state dividend will start being payable in 2016. CFE current general manager stays in his position. As of the publication of the Law, the CFE may authorize the creation of an affiliate company with the purpose of performing the activities of import, export, transportation, storage, purchase and sale of natural gas, coal and any other fuel. Contracting processes by CFE initiated under the former legislation will be finalized in accordance with that legislation.


Business Opportunities


Mexican Energy Reform

Business Opportunities, Especially for Foreign Investment 1. Electric Sector: represents a huge opportunity area (better developed and more open). 2. Hydrocarbon Sector: The exploration, production and refinement of petroleum will become important in future years as the area and market develops. 3. Immediate need of pipeline investment to grow the network and capacity for transportation of natural gas. Investment in exploitation of deep waters, shale gas, exploration and exploitation, as well as in ripe fields. 4. Energy Sector Supply Chain: There will be enormous opportunities, ranging from high technology suppliers to ancillary services providers (including food, uniforms, platforms, security, financing, machinery and equipment, water treatment plants, etc.).

5. Mergers and Acquisitions: Many players will try to acquire Mexican companies (for example, current suppliers to PEMEX and the CFE) or to associate with them. 6. Financial Sector: All transactions will require financing, which will have to come from Mexico and abroad at competitive rates and conditions.


Mexican Energy Reform

SOURCES OF INFORMATION Secretaría de Energía México Comisión Reguladora de Energía México.


JosĂŠ Antonio Postigo-Uribe japostigo@sanchezdevanny.com Gerardo Prado-HernĂĄndez gph@sanchezdevanny.com Guillermo VillaseĂąor-Tadeo gvillasenor@sanchezdevanny.com

Mexican Energy Reform, Constitutional / Reform and Secondary Legislation  

Sánchez Devanny Abogados José Antonio Postigo Uribe Gerardo Prado Hernández Guillermo Villaseñor Tadeo

Mexican Energy Reform, Constitutional / Reform and Secondary Legislation  

Sánchez Devanny Abogados José Antonio Postigo Uribe Gerardo Prado Hernández Guillermo Villaseñor Tadeo

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